Deck 30: Inflation: Its Causes and Costs

Question 1

The irrelevance of monetary changes for nominal variables is called monetary neutrality.

Answer 1

False

Question 2

The frequent changes to the price of petrol contradicts the concept of menu costs.

Answer 2

True

Question 3

A period of generally falling prices is called:

A) disinflation
B) depression
C) deflation
D) recession

Answer 3

deflation

Question 4

Because of inflation-induced changes in taxes on capital gains and interest income, higher inflation tends to discourage people from saving and lowers the rate of economic growth.

Question 5

High inflation and high deflation can both be regarded as a major economic problems.

Question 6

The adjustment of the nominal interest rate to the inflation rate is called the Fisher effect, after economist Irving Fisher, who first studied it.

Question 7

The velocity of money measures how many times per year the typical dollar coin is used to pay for a newly produced good or service.

Question 8

The growth of EFTPOS and internet banking has reduced shoeleather costs as people do not need to go into the bank anymore.

Question 9

If P represents the price of goods and services measured in money, then 1/P is the value of money measured in terms of goods and services. Hence when the overall price level rises, the value of money falls.

Question 10

If P is the price of goods and services measured in terms of money, then:

A) P measures the value of money measured in terms of goods and services
B) 1/P measures the number of dollars needed to buy a basket of goods and services
C) 1/P measures the quantity of goods and services that can be bought with $1
D) All of the above

Question 11

Why has Germany had much lower inflation than the US has over the past 50 years?

A) German economists are more skilled than US economists
B) The German economy does not rely on imported oil as much as the US economy does
C) The German economy is still benefiting from its post-World War I period of hyperdeflation
D) German policymakers have been extraordinarily averse to inflation

Question 12

Inflation can be measured by the:

A) absolute change in the CPI
B) percentage change in the CPI
C) absolute change in the GDP deflator
D) percentage change in the price of oil

Question 13

Unexpected inflation has no wealth redistribution effect on the population.

Question 14

The volume of computer chips produced is a nominal variable, and the revenue from the sale of computer chips is a real variable.

Question 15

Menu costs are costs of inflation limited to restaurants and fast-food establishments and are localised to countries.

Question 16

Given constant velocity and output, the notion that prices rise when more money is created:

A) is known as the natural rate theory
B) was first explained by Milton Friedman
C) is known as the Fisher effect of money
D) is known as the quantity theory of money

Question 17

An extraordinarily high rate of inflation is called:

A) disinflation
B) hyperinflation
C) hyperdisinflation
D) adverse inflation

Question 18

Deflation is defined as:

A) a period of declining output of goods and services
B) a period of time in which most prices fall
C) a period of time in which the value of money falls
D) a period of business pessimism

Question 19

The inflation tax is exactly like other taxes levied when the government prints money.

Question 20

Inflation is the increase in the overall level of prices.

Question 21

Graph 30-1

At point B in Graph 30-1: At point B in Graph 30-1:

A) the value of money is less than its equilibrium level
B) money supply is greater than money demand
C) the price level is higher than its equilibrium level
D) money demand is greater than money supply

Question 22

The demand for money is:

A) positively related to the interest rate
B) positively related to the price level
C) positively related to the money supply
D) negatively related to the money supply

Question 23

If the price level is below the equilibrium level, then:

A) money demand will be greater than money supply
B) money supply will be equal to money demand
C) the price level will rise
D) the price level will fall

Question 24

The principle of monetary neutrality implies that an increase in the money supply will:

A) decrease the price level
B) lower nominal interest rates
C) lower the unemployment rate
D) not affect real interest rates

Question 25

Nominal GDP measures:

A) the dollar value of the economy's output of goods and services
B) the total quantity of goods and services produced
C) the total income received from producing goods and services in constant dollars
D) all of the above

Question 26

Graph 30-1

When the money supply curve in Graph 30-1 shifts from MS₂ to MS₁:

A) the equilibrium value of money increases
B) the equilibrium price level increases
C) the supply of money has increased
D) the demand for goods and services will increase

Question 27

Graph 30-1

When the money supply curve in Graph 30-1 shifts from MS₂ to MS₁:

A) the equilibrium price level increases
B) this may be due to the RBA selling government securities
C) this is due to the RBA buying government securities
D) the demand for goods and services increasing

Question 28

An increase in the money supply:

A) increases the ability of the economy to produce goods and services, increases the demand for goods and services, and increases the price level
B) leaves unchanged the ability of the economy to produce goods and services, increases the demand for goods and services and increases the price level
C) leaves unchanged the ability of the economy to produce goods and services, increases the demand for goods and services and decreases the price level
D) leaves unchanged the ability of the economy to produce goods and services, decreases the demand for goods and services, and decreases the price level

Question 29

Which of the following statements is correct?

A) Economic variables measured in physical units are nominal variables, and economic variables measured in monetary units are real variables
B) Economic variables measured in physical units are real variables, and economic variables measured in monetary units are nominal variables
C) Economic variables measured in physical units are actual variables, and economic variables measured in monetary units are nominal variables
D) Economic variables measured in physical units are real variables, and economic variables measured in monetary units are actual variables

Question 30

Real GDP measures:

A) the dollar value of the economy's output of goods and services
B) the total quantity of goods and services produced
C) the total income received from producing goods and services in current dollars
D) all of the above

Question 31

In the long run, the _____ adjusts to equilibrate the quantity of money supplied with the quantity demanded.

A) real interest rates
B) money supply
C) price level
D) nominal interest rates

Question 32

According to the classical dichotomy, which of the following is determined by monetary factors?

A) The real wage
B) The nominal wage
C) The real interest rate
D) Real GDP

Question 33

The most important variable affecting the demand for money in the long run is the:

A) nominal interest rate
B) real interest rate
C) price level
D) velocity of money

Question 34

The supply of money is determined by:

A) the value of money
B) the price level
C) the Reserve Bank
D) the demand for money

Question 35

The relative price of oil is a(n):

A) actual variable
B) monetary variable
C) nominal variable
D) real variable

Question 36

The notion that nominal variables are heavily influenced by the quantity of money, and that money is largely irrelevant to understanding the determinants of real variables, is called:

A) monetarism
B) the quantity theory
C) the Fisher effect
D) the classical dichotomy

Question 37

As the price level increases:

A) people will want to hold less money
B) the quantity of money demanded will decrease
C) people will need more money for transactions
D) none of the above

Question 38

When money is neutral, an increase in the rate of inflation from 2 per cent to 5 per cent will _____.

A) increase the nominal interest rate by 3percentage points
B) increase the real interest rate by 3 percentage points
C) decrease the nominal interest rate by 3 percentage points
D) increase the nominal interest rate by less than 3 percentage points

Question 39

A rise in the price level means a:

A) deflation
B) higher value of money
C) lower value of money
D) lower value of goods

Question 40

If the money supply is increased, the:

A) interest rate will increase, which will increase the quantity of money demanded to restore equilibrium
B) interest rate will increase, which will decrease the quantity of money demanded to restore equilibrium
C) price level will decrease, which will decrease the quantity of money demanded to restore equilibrium
D) price level will increase which will increase the quantity of money demanded to restore equilibrium

Question 41

Expected inflation redistributes wealth from _____.

A) creditors to debtors
B) owners of real property to owners of financial assets
C) debtors to creditors
D) the government to fixed income recipients

Question 42

Money neutrality is the proposition that:

A) changes in the money supply do not affect real variables
B) changes in the money demand do not affect real variables
C) changes in the money supply do not affect prices
D) changes in the money demand do not affect prices

Question 43

Which of the following statements is not correct when more money is created?

A) The price level must rise
B) The quantity of output must rise
C) The velocity of money must fall
D) None of the above

Question 44

Based on the quantity equation, if M = 15, V = 3, and Y = 30, then P =:

A) 1/5
B) 1.2
C) 15
D) 1.5

Question 45

If the price level is above the equilibrium level, then:

A) money demand will be greater than money supply
B) money demand will be smaller than money supply
C) money supply will be equal to money demand
D) the price level will rise

Question 46

According to the Fisher effect, an increase in the rate of inflation from 3 per cent to 4 per cent will _____.

A) increase the nominal interest rate by 7 percentage points
B) increase the real interest rate by 3 percentage points
C) decrease the nominal interest rate by 3 percentage points
D) increase the nominal interest rate by 1 percentage point

Question 47

The Fisher effect is:

A) the one-for-one adjustment of the nominal GDP to the inflation rate
B) the one-for-one adjustment of the nominal interest rate to the nominal GDP
C) the one-for-one adjustment of the nominal interest rate to the inflation rate
D) the one-for-one adjustment of the nominal GDP to the rate of money growth

Question 48

The demand for money depends on:

A) the interest rate
B) the average level of prices in the economy
C) income
D) all of the above

Question 49

Paying for a government program by printing money:

A) reduces the opportunity cost of the program
B) is exactly like imposing an income tax to pay for the program
C) imposes an inflation tax to pay for the program
D) all of the above

Question 50

The Fisher effect is that:

A) Real interest rate = Nominal interest rate + Inflation rate
B) Inflation rate = Real interest rate - Nominal interest rate
C) Nominal interest rate = Real interest rate + Inflation rate
D) Nominal interest rate = Real interest rate - Inflation rate

Question 51

According to the quantity equation, if M increases by 12% and V and P are constant, then:

A) Y will remain constant
B) Y will decrease
C) Y will increase by 12%
D) Y will decrease by 12%

Question 52

Consider a simple economy that produces only chocolates. The economy produces 100 bars of chocolates in a year, and a chocolate bar costs $5. If the quantity of money supplied in the economy is $25, then the velocity of money is:

A) 2.5
B) 10
C) 20
D) 1000

Question 53

The classical dichotomy is:

A) the separation of money and goods markets
B) the theoretical separation of nominal and real variables
C) the separation of the monetary system and production system
D) the separation of goods and services produced today and goods and services produced tomorrow

Question 54

The inflation tax:

A) is collected by the government every time people use money for transaction
B) transfers wealth from government to households
C) is paid by everyone who holds money
D) all of the above

Question 55

If the bank posts a nominal interest rate of 7 per cent per year and the inflation rate is 4 per cent per year, then the real interest rate is:

A) -3 per cent
B) 3 per cent
C) 4 per cent
D) 11 per cent

Question 56

If between when you purchase an asset and sell it, the general price level and the price of the asset both double, then you have realised a:

A) capital gain
B) real gain
C) capital loss
D) real loss

Question 57

The evidence gained from studying hyperinflation indicates that:

A) inflation rates parallel money supply growth rates
B) nominal interest rates are independent of the money supply
C) the rate of inflation is not closely related to the rate at which the money supply changes
D) none of the above

Question 58

Which of the following variables is not a real variable?

A) The amount of corn
B) The nominal interest rate adjusted for inflation
C) The dollar wage
D) The price of bananas relative to the price of oranges

Question 59

In order to maintain stable prices, the central bank must:

A) be more accountable to the public
B) maintain strict control over the money supply
C) hire more economists

Question 60

If between when you purchase an asset and sell it, the general price level and the price of the asset both double, then you have realised a:

A) capital gain
B) real gain
C) capital loss
D) real loss

Question 61

How do the relative-price distortions caused by inflation create a misallocation of resources?

Question 62

Given that petrol is key to the transport sector and all other sectors in Australia, why does the constant changing of price petrol not create menu costs?

Question 63

Is David Hume's description of the classical dichotomy and monetary neutrality a good description of the actual economy? Explain.

Question 64

What would critics of the RBA's view believe will happen if the money supply is tightened to control inflation?

Question 65

Explain inflation tax. How does government collect the inflation tax and who pays this tax?

Question 66

Unexpected inflation redistributes wealth among debtors and creditors. Who benefits - creditors or debtors? Explain.

Question 67

What is the classical dichotomy, and to whom do we attribute it?

Question 68

Why does the demand for money curve slope downwards to the right?

Question 69

What is the quantity equation, and how is it used to explain the equilibrium price level?

Question 70

What are the costs of inflation?

Question 71

What is the real interest rate under each of the following scenarios?
a. The nominal interest rate is 4 per cent and the inflation rate is 3 per cent
b. The nominal interest rate is 6 per cent and the inflation rate is -1 per cent
c. The nominal interest rate is 5 per cent and the inflation rate is 7 per cent

Question 72

Calculate the velocity of money for each of the following situations:
a. The money supply is 1000, the price level is 20 and output is 200
b. The money supply is 50, the price level is 100 and output is 20
c. The money supply is 25, the price level is 25 and output is 200
d. The money supply is 800, the price level is 2 and output is 300

Question 73

Unxpected inflation redistributes wealth from _____.

A) creditors to debtors
B) owners of real property to owners of financial assets
C) debtors to creditors
D) the government to fixed income recipients

Question 74

By reducing the cash rate in the US to almost zero per cent, what would critics of the Federal Reserve Bank (the Fed - The US central bank) believe about the Fed's ability to stimulate the economy?